Better gas mileage adds up to fewer dollars lost at the pump

08:00 AM CDT on Tuesday, August 10, 2004

By SCOTT BURNS / The Dallas Morning News

Allow me to introduce a new investment vehicle: your car.

No, I'm not talking about investing in cars that rise in value. We all know that virtually never happens. Cars are a wasting asset. They lose value faster than money. Drive a new car off the lot and it's lost value before you get it into the garage.

So your car isn't a true investment vehicle.

But its fuel efficiency can be. Exchange your fuel-inefficient vehicle for one that gets better gas mileage and you'll consume less gasoline. Every gallon not consumed is money not spent.

The basic math isn't difficult. As many readers know, the Burns family started driving a Toyota Prius hybrid last year. By my calculations, trading in my 18-miles-per-gallon turbo New Beetle for the 45-mpg Prius saves about 500 gallons a year. At $2 a gallon, that's $1,000 a year.

To have $1,000 a year to spend on gasoline, I would need to have $1,176 in dividends before the 15 percent tax rate on a stock investment. And to earn $1,176 in dividends from the companies of the Standard & Poor's 500 index, I'd have to invest $78,431 – since the S&P 500 yield is only about 1.5 percent.

That's a lot of money. It is more than most people have in their 401(k) accounts.

It isn't so bad if you start comparing the gas savings to the amount you'd need to invest in bonds or CDs, either.

To have $1,000 to spend on gasoline, a person in the 25 percent tax bracket would have to earn $1,333 in pre-tax interest. With five-year Treasury obligations yielding about 3.73 percent, you'd need to invest $35,746 to come up with $1,000 for the gas pump.

That's still a lot of money. Indeed, it's the price of a rather nicely equipped luxury car. Is there a message here?

I think so. The market is telling us there's more opportunity in how we select the car we drive than in how we invest our savings.

Note that I said "car." I didn't say "Prius."

This idea can work on any two cars. All you have to do is exchange a low-mileage car for a better-mileage car. The improvement doesn't have to be heroic: You don't need to exchange a 10-mpg Hummer for a 60-mpg Honda Insight.

To explore the benefits of trading cars, I built a little calculator. It lets me enter the mileage of the cars to be exchanged; the estimated miles to be driven each year; and the current cost of gasoline. From this information, it automatically calculates the gallons consumed by each car, the annual gallons saved, and the dollar value of the fuel savings.

Then it goes a step further. It calculates how much you would have to invest in stocks or bonds to provide the money from the fuel savings. The results are surprising. Here are two samples:

Replace an older Jeep Cherokee 4WD with a 4WD Toyota RAV4: Suppose you replace your 15,000-miles-a-year, 18-mpg car with a moderately more efficient 24-mpg car? You'll save 208.3 gallons a year, or $416.67. To generate the necessary money in stocks, you'd need to buy a portfolio worth $32,680 – or bonds worth $13,889.

Change your lifestyle: Replace your aging Land Rover with a new Mini Cooper. This is a major change, but you can blame it on a movie, The Italian Job. You are getting rid of a 13-mpg guzzler and trading it for one of the sexiest little cars out there, even at 30 mpg. And you're sure to drive at least 15,000 miles a year. This will save you 653.8 gallons a year, or $1,307.69. Earning the money on investments would require an equity portfolio of $102,564 or a bond portfolio of $43,590.

I could go on, but you get the idea. If you'd like to experiment, try the calculator on my Web site, www.scottburns.com. Remember, this will work on any two cars. Fuel efficiency doesn't have to be extreme to pay off.

Scott Burns answers questions of general interest in his Thursday columns. Write Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, Texas 75265, or send an e-mail.

E-mail sburns@dallasnews.com